A Positive Theory of Fiscal Deficits and Government Debt in a Democracy

Abstract

This paper considers an economy in which policyniakers with different preferences concerning fiscal policy alternate in office as a result of democratic elections.It is shown that in this situation government debt becomes a strategic variable used by each policymaker to influence the choices of his successors.In particular, if different policymakers disagree about the desired composition of government spending between two public goods, the economy exhibits a deficits bias.Namely, in this economy debt accumulation is higher than it would be with a social planner.According to the results of our model, the equilibrium level of government debt is larger: the larger is the degree of polarization between alternating governments;and the more likely it is that the current government will not be reelected.The paper has empirical implications which may contribute to explain the current fiscal policies in the United States and in several other countries.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 166 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.